REG 4 - Corporate Taxable Income

Question 1

Define temporary differences and provide three examples?

Answer 1

• Cash received in ADVANCE of accrual GAAP income is taxed

1) Interest income received in advance
2) Rental income received in advance (nonrefundable rent deposits and lease cancellation is rental income)
3) Royalty income received in advance

Question 2

Define permanent differences and provide three examples?

Answer 2

• GAAP income items NOT included as taxable income

1) Interest income from municipal or state bonds (federal bonds are taxable)
2) Proceeds from life insurance of officer
3) Federal income taxes

Question 3

How much in revenue must a corporation make in order to file on the accrual basis? Is inventory recorded on the cash basis or accrual basis?

Answer 3

Taxpayers with annual gross receipts of $5 million for the three-year period ending prior to the year MUST be accrual basis.

Inventory is always recorded on the accrual basis

Question 4

Define domestic production deduction? What are examples?

Answer 4

• Corporation’s can take 9% deduction of the lesser of:

1) Qualified production activities income (QPAI)
OR
2) Taxable income

Examples:

• Manufacturing in U.S.
• Producing in U.S.
• Growing in U.S.
• Extracting in U.S.
• Constructing in U.S.
• Providing engineering services in U.S.
• Providing architectural services in U.S.

Question 5

How do you calculate qualified production activities income (QPAI)?

Answer 5

Domestic production gross receipts
Less: cost of goods sold
Less: other directly allocable expenses or losses
Less: proper share of other deductions
= QPAI

Question 6

What is the maximum amount a corporation can deduct for CEO or the four other most highly compensated officers?

Answer 6

$1,000,000

Question 7

When must bonus accruals to non-shareholders and employees be paid?

Answer 7

Must pay by April 15th

Question 8

How are tax deductions used for bad debts for accrual basis vs cash basis?

Answer 8

Accrual basis - tax deductible when specific AR is written off (direct write-off method)

Cash basis - no deduction (it was never income)

Question 9

How is interest expense deducted for following:

• Business interest
• Investment interest
• Prepaid interest

Answer 9

• Business interest - deducted when incurred and paid
• Investment interest - deducted up to investment income (like individuals)
• Prepaid interest - is NOT deducted until it is incurred

Question 10

What is the percentage limitation for charitable contributions that a corporation can make? When must a corporation make charitable contributions by?

Answer 10

• Corporations can deduct 10% of adjusted taxable income from charitable contributions
• Charitable contributions must be accrued and paid by April 15th.

Question 11

What percentage of business casualty loss is deductible? How do you calculate partially destroyed and fully destroyed?

Answer 11

• 100% deductible

For property partially destroyed:
Deduct the lesser of:
1) The change in FMV less insurance proceeds
2) NBV less insurance proceeds

For property fully destroyed:
Deducted:
1) NBV less insurance proceeds

E.g. Bad Luck Inc. has a casualty loss for a building that had a FMV of $850,000. The FMV after the casualty is $400,000. The NBV is $600,000. The insurance proceeds are $300,000.

Partially destroyed: (850,000 - 400,000) - 300,000 = $150,000

Fully destroyed: (600,000 - 300,000) = $300,000

Question 12

How do organizational expenditures and start-up costs get expensed and amortized?

Answer 12

• Organizational expenditures are expensed up to $5,000 and the remaining excess is amortized over 15 years (180 months)
• Start-up costs are expensed up to $5,000 and the remaining excess is amortized over 15 years (180 months)

Question 13

What is included in start-up costs? What is excluded in start-up costs?

Answer 13

Included costs:

• Legal services
• Drafting corporate charter
• Bylaws
• Minutes of organization meetings
• Accounting services
• State incorporation

Excluded costs:

• Issuing and selling stock
• Commissions
• Underwriter’s fees
• Costs incurred in transfer of assets

Kristi Corp has following organizational expenses:
Legal fees - $15,000
Accounting services - $5,000
State incorporation - $3,000
Cost of selling shares - $10,000

• Only the $15,000, $5,000, and $3,000 can be used as start-up costs

Step 1) $15,000 + $5,000 + $3,000 = $23,000

Step 2) $23,000 - $5,000 (expense amount) = $18,000

Step 3) $18,000 / 180 months (amortization amount) = $100/month